South Korea’s tech-heavy junior bourse Kosdaq is on a roll. Investors are turning their attention to smaller firms as the country’s new government is keen to support small and mid-sized enterprises as part of a policy of sustainable economic growth.

The Kosdaq, the Korean equivalent of Nasdaq, had been in the doldrums for years since the index hit a high 841 points in July 2007 before the global financial crisis. But it has staged a strong comeback in recent months on the belief that SMEs could benefit from the growing political pressure on big family-run conglomerates.

The Kosdaq index has gained more than 10 per cent so far this year to 547 with its market capitalisation surpassing Won120tn ($106bn) as president Park Geun-hye has promised to foster venture companies under the catchy slogan of developing a “creative economy” since taking office in late February. The government plans to pour billions of dollars into SMEs to create a second venture boom, by expanding easy credit and tax breaks for them. SMEs account for 90 per cent of jobs in Korea.

“The measures for ventures are aimed at realising the development of a creative economy, and boosting Korea to be a leader rather than a follower,” finance minister Hyun Oh-seok said last month.

The Kosdaq hit a five-year high of 580 late last month, as foreign investors and local institutions snapped up smartphone parts suppliers, biotechnology companies and entertainment-related groups. Foreign investors now hold 8.6 per cent of the Kosdaq market, while their ownership of the main bourse amounts to 34 per cent.

The Kosdaq’s rally is in sharp contrast with the benchmark Kospi index, which has fallen 3.3 per cent year to date, as foreign investors shied away from big manufacturers such as Samsung Electronics and Hyundai Motor, as the weaker yen clouds their earnings outlook. The country’s family-run chaebol firms have become less attractive as politicians pledge to crack down on them amid growing calls for “economic democratisation”.

Analysts warn that the Kosdaq seems to be overheating, although investors’ preference for small and mid-cap shares could last for a while amid low interest rates and the government’s policy initiatives toward supporting SMEs. “Investors need to lower expectations for further upside on the Kodaq,” says Chung Hoon-suk at Korea Investment & Securities. “But selective investment in SMEs with strong earnings momentum still looks okay, although the market’s volatility is expected to increase,” he added, recommending mobile content providers, education-related shares, high dividend shares and venture capital-related shares.

Related reading:
Regulator probes South Korea’s small cap boom
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Rebalancing Korea’s economy: easier said than done
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Seoul SME bourse plan faces scepticism
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